NWLI 2013 Q2 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
R      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2013
o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________ to __________
 
 
Commission File Number: 2-17039
 
 
 
 
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
COLORADO
84-0467208
(State of Incorporation)
(I.R.S. Employer Identification Number)
 
 
850 EAST ANDERSON LANE
 
AUSTIN, TEXAS 78752-1602
(512) 836-1010
(Address of Principal Executive Offices)
(Telephone Number)


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes R   No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). : Yes R   No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated file" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  £     Accelerated filer  R   Non-accelerated filer  £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No R
As of August 5, 2013, the number of shares of Registrant's common stock outstanding was: Class A – 3,434,763 and  Class B - 200,000.




TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
June 30, 2013 (Unaudited) and December 31, 2012
 
 
For the Three Months Ended June 30, 2013 and 2012 (Unaudited)
 
 
For the Six Months Ended June 30, 2013 and 2012 (Unaudited)
 
 
For the Three Months Ended June 30, 2013 and 2012 (Unaudited)
 
 
For the Six Months Ended June 30, 2013 and 2012 (Unaudited)
 
 
For the Six Months Ended June 31, 2013 and 2012 (Unaudited)
 
 
For the Six Months Ended June 30, 2013 and 2012 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

 
(Unaudited)
 
 
ASSETS
June 30,
2013
 
December 31,
2012
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $6,491,176 and $6,503,627)
$
6,232,872

 
5,962,120

Securities available for sale, at fair value (cost: $2,626,174 and $2,658,512)
2,769,878

 
2,826,001

Mortgage loans, net of allowance for possible losses ($650 and $650)
119,372

 
142,170

Policy loans
70,795

 
71,549

Derivatives, index options
121,890

 
57,890

Other long-term investments
31,977

 
41,439

 
 
 
 
Total investments
9,346,784

 
9,101,169

 
 
 
 
Cash and short-term investments
68,232

 
124,561

Deferred policy acquisition costs
753,105

 
705,397

Deferred sales inducements
166,984

 
152,844

Accrued investment income
95,279

 
92,665

Federal income tax receivable
—

 
5,655

Other assets
82,393

 
81,567

 
 
 
 
Total assets
$
10,512,777

 
10,263,858


See accompanying notes to condensed consolidated financial statements (unaudited).

3
Table of Contents


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
June 30,
2013
 
December 31,
2012
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
8,670,321

 
8,430,545

Traditional life reserves
137,318

 
138,309

Other policyholder liabilities
165,230

 
148,561

Deferred Federal income tax liability
22,491

 
55,054

Federal income tax payable
6,708

 
—

Other liabilities
110,529

 
99,709

 
 
 
 
Total liabilities
9,112,597

 
8,872,178

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

Class A - $1 par value; 7,500,000 shares authorized; 3,434,763 issued and outstanding in 2013 and 2012
3,435

 
3,435

Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2013 and 2012
200

 
200

Additional paid-in capital
37,767

 
37,767

Accumulated other comprehensive income
41,663

 
76,786

Retained earnings
1,317,115

 
1,273,492

 
 
 
 
Total stockholders’ equity
1,400,180

 
1,391,680

 
 
 
 
Total liabilities and stockholders' equity
$
10,512,777

 
10,263,858


Note:  The Condensed Consolidated Balance Sheet at December 31, 2012, has been derived from the audited Consolidated Financial Statements as of that date.

See accompanying notes to condensed consolidated financial statements (unaudited).


4
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended June 30, 2013 and 2012
(Unaudited)
(In thousands, except per share amounts)
 
2013
 
2012
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
40,363

 
36,653

Traditional life premiums
5,218

 
4,904

Net investment income
129,687

 
78,181

Other revenues
5,990

 
5,866

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
(72
)
 
(185
)
Portion of OTTI (gains) losses recognized in other comprehensive income
(106
)
 
(235
)
Net OTTI losses recognized in earnings
(178
)
 
(420
)
Other net investment gains (losses)
1,779

 
2,425

Total net realized investment gains (losses)
1,601

 
2,005

 
 
 
 
Total revenues
182,859

 
127,609

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
18,450

 
13,857

Amortization of deferred policy acquisition costs
28,852

 
31,349

Universal life and annuity contract interest
71,438

 
26,004

Other operating expenses
24,843

 
22,452

 
 
 
 
Total benefits and expenses
143,583

 
93,662

 
 
 
 
Earnings before Federal income taxes
39,276

 
33,947

 
 
 
 
Federal income taxes
12,285

 
10,701

 
 
 
 
Net earnings
$
26,991

 
23,246

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
7.64

 
6.58

Class B
$
3.82

 
3.29

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
7.62

 
6.58

Class B
$
3.82

 
3.29


See accompanying notes to condensed consolidated financial statements (unaudited).


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Table of Contents


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 2013 and 2012
(Unaudited)
(In thousands, except per share amounts)
 
 
 
 
 
2013
 
2012
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
78,262

 
72,852

Traditional life premiums
9,082

 
8,987

Net investment income
310,501

 
227,739

Other revenues
12,132

 
11,521

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
310

 
(462
)
Portion of OTTI (gains) losses recognized in other comprehensive income
(549
)
 
(157
)
Net OTTI losses recognized in earnings
(239
)
 
(619
)
Other net investment gains (losses)
4,153

 
3,791

Total net realized investment gains (losses)
3,914

 
3,172

 
 
 
 
Total revenues
413,891

 
324,271

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
31,140

 
27,535

Amortization of deferred policy acquisition costs
59,656

 
63,060

Universal life and annuity contract interest
211,738

 
127,547

Other operating expenses
46,767

 
42,470

 
 
 
 
Total benefits and expenses
349,301

 
260,612

 
 
 
 
Earnings before Federal income taxes
64,590

 
63,659

 
 
 
 
Federal income taxes
20,967

 
20,672

 
 
 
 
Net earnings
$
43,623

 
42,987

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
12.34

 
12.16

Class B
$
6.17

 
6.08

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
12.32

 
12.16

Class B
$
6.17

 
6.08



See accompanying notes to condensed consolidated financial statements.


6
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended June 30, 2013 and 2012
(Unaudited)
(In thousands)

 
2013
 
2012
 
 
 
 
Net earnings
$
26,991

 
23,246

 
 
 
 
Other comprehensive income, net of effects of deferred costs and taxes:
 

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
(33,107
)
 
5,624

Net unrealized liquidity gains (losses)
20

 
161

Reclassification adjustment for net amounts included in net earnings
(1,037
)
 
(1,658
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
—

 
 
 
 
Net unrealized gains (losses) on securities
(34,124
)
 
4,127

 
 
 
 
Foreign currency translation adjustments
3

 
(101
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
373

 
225

 
 
 
 
Other comprehensive income
(33,748
)
 
4,251

 
 
 
 
Comprehensive income
$
(6,757
)
 
27,497


See accompanying notes to condensed consolidated financial statements (unaudited).


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Table of Contents


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2013 and 2012
(Unaudited)
(In thousands)
 
 
 
 
 
2013
 
2012
 
 
 
 
Net earnings
$
43,623

 
42,987

 
 
 
 
Other comprehensive income, net of effects of deferred costs and taxes:
 

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
(34,232
)
 
13,376

Net unrealized liquidity gains (losses)
158

 
137

Reclassification adjustment for net amounts included in net earnings
(2,396
)
 
(2,698
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
1

 
 
 
 
Net unrealized gains (losses) on securities
(36,470
)
 
10,816

 
 
 
 
Foreign currency translation adjustments
593

 
285

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain
754

 
448

 
 
 
 
Other comprehensive income
(35,123
)
 
11,549

 
 
 
 
Comprehensive income
$
8,500

 
54,536



See accompanying notes to condensed consolidated financial statements.


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Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2013 and 2012
(Unaudited)
(In thousands)

 
2013
 
2012
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
3,635

 
3,635

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
3,635

 
3,635

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
37,767

 
37,767

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
37,767

 
37,767

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
91,972

 
69,116

Change in unrealized gains during period, net of tax
(36,628
)
 
10,679

 
 
 
 
   Balance at end of period
55,344

 
79,795

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(1,426
)
 
(2,320
)
Amortization
77

 
15

Other-than-temporary impairments, non-credit, net of tax
23

 
92

Additional credit loss on previously impaired securities
14

 
—

Change in shadow deferred policy acquisition costs
(77
)
 
30

 
 
 
 
   Balance at end of period
(1,389
)
 
(2,183
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

Balance at beginning of period
(196
)
 
(608
)
Other-than-temporary impairments, non-credit, net of tax
—

 
—

Change in shadow deferred policy acquisition costs
(123
)
 
—

Recoveries, net of tax
244

 
—

 
 
 
 
  Balance at end of period
(75
)
 
(608
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
For the Six Months Ended June 30, 2013 and 2012
(Unaudited)
(In thousands)

 
2013
 
2012
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
2,589

 
2,368

Change in translation adjustments during period
593

 
285

 
 
 
 
  Balance at end of period
3,182

 
2,653

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(16,153
)
 
(15,380
)
Amortization of net prior service cost and net gain, net of tax
754

 
448

 
 
 
 
  Balance at end of period
(15,399
)
 
(14,932
)
 
 
 
 
Accumulated other comprehensive income at end of period
41,663

 
64,725

 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,273,492

 
1,182,207

   Net earnings
43,623

 
42,987

   Stockholder dividends
—

 
—

 
 
 
 
   Balance at end of period
1,317,115

 
1,225,194

 
 
 
 
Total stockholders' equity
$
1,400,180

 
$
1,331,321


See accompanying notes to condensed consolidated financial statements (unaudited).



10
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2013 and 2012
(Unaudited)
(In thousands)
 
2013
 
2012
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
43,623

 
42,987

Adjustments to reconcile net earnings to net cash from operating activities:
 

 
 

Universal life and annuity contract interest
211,738

 
127,547

Surrender charges and other policy revenues
(7,105
)
 
(7,009
)
Realized (gains) losses on investments
(3,914
)
 
(7,743
)
Accrual and amortization of investment income
(1,487
)
 
(1,400
)
Depreciation and amortization
2,813

 
2,841

(Increase) decrease in value of index options
(91,124
)
 
(9,959
)
(Increase) decrease in deferred policy acquisition and sales inducement costs
(4,984
)
 
3,664

(Increase) decrease in accrued investment income
(2,224
)
 
(2,301
)
(Increase) decrease in other assets
(2,594
)
 
(3,960
)
Increase (decrease) in liabilities for future policy benefits
5,349

 
3,602

Increase (decrease) in other policyholder liabilities
16,669

 
2,797

Increase (decrease) in Federal income taxes
(563
)
 
(12,757
)
Increase (decrease) in other liabilities
87

 
3,385

Other, net
—

 
128

 
 
 
 
Net cash provided by operating activities
166,284

 
141,822

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities available for sale
9,670

 
(367
)
Other investments
11,925

 
3,492

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
710,366

 
696,502

Securities available for sale
128,127

 
177,601

Index options
54,640

 
941

Purchases of:
 

 
 

Securities held to maturity
(970,658
)
 
(785,820
)
Securities available for sale
(191,387
)
 
(271,552
)
Index options
(28,498
)
 
(26,153
)
Other investments
(15
)
 
(4,263
)
Principal payments on mortgage loans
25,490

 
38,154

Cost of mortgage loans acquired
(2,419
)
 
(8,403
)
Decrease (increase) in policy loans
754

 
598

Other, net
(3
)
 
—

 
 
 
 
Net cash used in investing activities
(252,008
)
 
(179,270
)
 
 
 
 
 
Continued on Next Page
 

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Six Months Ended June 30, 2013 and 2012
(Unaudited)
(In thousands)
 
2013
 
2012
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
477,776

 
454,963

Return of account balances on universal life and annuity contracts
(448,973
)
 
(425,827
)
Issuance of common stock under stock option plan
—

 
—

 
 
 
 
Net cash provided by financing activities
28,803

 
29,136

 
 
 
 
Effect of foreign exchange
592

 
286

 
 
 
 
Net increase (decrease) in cash and short-term investments
(56,329
)
 
(8,026
)
Cash and short-term investments at beginning of period
124,561

 
119,290

 
 
 
 
Cash and short-term investments at end of period
$
68,232

 
$
111,264

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
30

 
$
20

Income taxes
$
22,695

 
$
33,495

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
1,429

 
$
158


See accompanying notes to condensed consolidated financial statements (unaudited).



12
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



(1)
 CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of National Western Life Insurance Company and its subsidiaries (“Company” or "National Western") as of June 30, 2013, and the results of its operations and its cash flows for the for the three and six months ended June 30, 2013 and 2012. The results of operations for the six months ended June 30, 2013 and 2012 are not necessarily indicative of the results to be expected for the full year. It is recommended that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 accessible free of charge through the Company's internet site at www.nationalwesternlife.com or the Securities and Exchange Commission internet site at www.sec.gov. The condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements as of that date.

The accompanying unaudited condensed consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly-owned subsidiaries: The Westcap Corporation, NWL Investments, Inc., NWL Services, Inc., NWL Financial, Inc., NWLSM, Inc. and Regent Care San Marcos Holdings, LLC. All significant intercorporate transactions and accounts have been eliminated in consolidation.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include (1) liabilities for future policy benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs, (4) valuation allowances for deferred tax assets, (5) other-than-temporary impairment losses on debt securities, (6) commitments and contingencies, and (7) valuation allowances for mortgage loans and real estate.

Certain amounts in the prior year condensed consolidated financial statements have been reclassified to conform to the current year presentation.


(2)
 NEW ACCOUNTING PRONOUNCEMENTS

During February 2013, the FASB issued new guidance related to the presentation of amounts reclassified out of accumulated other comprehensive income. The new guidance requires disclosure on the statement of income amounts reclassified. As the Company already reports reclassifications on its Income Statement and Statement of Comprehensive Income the new guidance will not have a significant impact on the Company's consolidated financial statements and results of operations.

During October 2010, the Financial Accounting Standards Board ("FASB") issued new guidance affecting insurance companies that incur costs in the acquisition of new and renewal insurance contracts.  The guidance addresses the diversity in practice regarding the interpretation for which costs relating to the acquisition of new or renewal business qualifies for deferral.  The new guidance specifies the acquisition costs which are capitalizable and those which must be expensed.  The effective date is for interim and annual periods ending after December 15, 2011.  The adoption of this guidance was effective January 1, 2012. See Note 1, Summary of Significant Accounting Policies, of the accompanying consolidated financial statements for additional disclosures.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Pubic Accounts ("AICPA"), and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future condensed consolidated financial statements.




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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(3)
 STOCKHOLDERS' EQUITY

The Company is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance.  The restrictions are based on the greater of statutory earnings from operations excluding capital gains or 10% of statutory capital and surplus of the Company.  The maximum dividend payment which may be made without prior approval in 2013 is $100.5 million. The Company did not declare or pay cash dividends on common stock during the six months ended June 30, 2013 or 2012.


(4)
 EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income by the weighted-average basic common shares outstanding during the period. Diluted earnings per share assumes the issuance of common shares applicable to stock options in the denominator.
 
Three Months Ended June 30,
 
2013
 
2012
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
26,991

 
 
 
23,246

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
26,991

 
 
 
23,246

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
26,227

 
764

 
22,589

 
658

 
 
 
 
 
 
 
 
Net income
$
26,227

 
764

 
22,589

 
658

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings per share - weighted-average shares
3,435

 
200

 
3,435

 
200

Effect of dilutive stock options
7

 
—

 
—

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,442

 
200

 
3,435

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
7.64

 
3.82

 
6.58

 
3.29

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
7.62

 
3.82

 
6.58

 
3.29


14
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
Six Months Ended June 30,
 
2013
 
2012
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
43,623

 
 
 
42,987

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
43,623

 
 
 
42,987

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
42,389

 
1,234

 
41,771

 
1,216

 
 
 
 
 
 
 
 
Net income
$
42,389

 
1,234

 
41,771

 
1,216

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings per share - weighted-average shares
3,435

 
200

 
3,435

 
200

Effect of dilutive stock options
6

 
—

 
—

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,441

 
200

 
3,435

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
12.34

 
6.17

 
12.16

 
6.08

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
12.32

 
6.17

 
12.16

 
6.08




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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(5)
 PENSION AND OTHER POSTRETIREMENT PLANS

(A)
Defined Benefit Pension Plans

The Company sponsors a qualified defined benefit pension plan covering substantially all employees. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that complies with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). On October 19, 2007, the Company's Board of Directors approved an amendment to freeze the Pension Plan as of December 31, 2007. The freeze ceased future benefit accruals to all participants and closed the plan to any new participants. In addition, all participants became immediately 100% vested in their accrued benefits as of that date. Going forward, future pension expense is projected to be minimal. Fair values of plan assets and liabilities are measured as of the prior December 31 for each respective year. The following table summarizes the components of net periodic benefit cost.

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
47

 
43

 
95

 
87

Interest cost
218

 
232

 
436

 
464

Expected return on plan assets
(283
)
 
(267
)
 
(567
)
 
(535
)
Amortization of prior service cost
1

 
1

 
2

 
2

Amortization of net loss
203

 
197

 
406

 
393

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
186

 
206

 
372

 
411


The service costs shown in the above table represent plan expenses expected to be paid out of plan assets. Under clarification provided by the Pension Protection Act, plan expenses paid from plan assets are to be included in the plan's service cost component.

The Company's minimum required contribution for the 2013 plan year is $0.7 million of which it expects to contribute approximately $0.4 million during 2013 with the remainder to be contributed in 2014. In addition, the Company had a remaining contribution payable for the 2012 plan year of $0.1 million which it paid during the first quarter of 2013. As of June 30, 2013, the Company had contributed a total of $0.2 million to the plan for the 2013 and 2012 plan years.

The Company also sponsors a non-qualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation. The pension obligations and administrative responsibilities of the plan are maintained by a pension administration firm, which is a subsidiary of American National Insurance Company ("ANICO"). ANICO has guaranteed the payment of pension obligations under the plan. However, the Company has a contingent liability with respect to the plan should these entities be unable to meet their obligations under the existing agreements. Also, the Company has a contingent liability with respect to the plan in the event that a plan participant continues employment with the Company beyond age seventy, the aggregate average annual participant salary increases exceed 10% per year, or any additional employees become eligible to participate in the plan. If any of these conditions are met, the Company would be responsible for any additional pension obligations resulting from these items. Amendments were made to the plan to allow an additional employee to participate and to change the benefit formula for the Chairman of the Company. As previously mentioned, these additional obligations are a liability to the Company. Effective December 31, 2004, this plan was frozen with respect to the continued accrual of benefits of the Chairman and the President of the Company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").

Effective July 1, 2005, the Company established a second non-qualified defined benefit plan for the benefit of the Chairman of the Company. This plan is intended to provide for post-2004 benefit accruals that mirror and supplement the pre-2005 benefit accruals under the previously discussed non-qualified defined benefit plan, while complying with the requirements of the Act.


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Effective November 1, 2005, the Company established a third non-qualified defined benefit plan for the benefit of the President of the Company. This plan is intended to provide for post-2004 benefit accruals that supplement the pre-2005 benefit accruals under the first non-qualified defined benefit plan as previously discussed, while complying with the requirements of the Act.

The following table summarizes the components of net periodic benefit costs for the Chairman and President non-qualified defined benefit plans.

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
45

 
42

 
89

 
84

Interest cost
200

 
228

 
400

 
456

Amortization of prior service cost
14

 
15

 
29

 
30

Amortization of net loss
293

 
286

 
587

 
571

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
552

 
571

 
1,105

 
1,141


The Company expects to contribute $2.0 million to these plans in 2013.  As of June 30, 2013, the Company has contributed $0.9 million to the plans.

(B)
Defined Benefit Postretirement Healthcare Plans

The Company sponsors two healthcare plans to provide postretirement benefits to certain fully-vested individuals.  The following table summarizes the components of net periodic benefit costs.

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
30

 
33

 
59

 
65

Amortization of prior service cost
25

 
26

 
51

 
52

Amortization of net loss
8

 
9

 
16

 
20

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
63

 
68

 
126

 
137


The Company expects to contribute minimal amounts to the plan in 2013.


17
Table of Contents
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(6)
SEGMENT AND OTHER OPERATING INFORMATION

The Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas.  A summary of segment information for the quarters ended June 30, 2013 and June 30, 2012 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
Selected Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
45,391

 
231,684

 
643,014

 
—

 
920,089

Total segment assets
522,003

 
1,134,181

 
8,420,780

 
253,831

 
10,330,795

Future policy benefits
454,359

 
875,672

 
7,477,608

 
—

 
8,807,639

Other policyholder liabilities
13,109

 
14,734

 
137,387

 
—

 
165,230

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

June 30, 2013
 
 
 
 
 
 
 
 
 

Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
9,413

 
30,177

 
5,991

 
—

 
45,581

Net investment income
8,242

 
13,637

 
102,805

 
5,003

 
129,687

Other revenues
(3
)
 
108

 
(9
)
 
5,894

 
5,990

 
 
 
 
 
 
 
 
 
 
Total revenues
17,652

 
43,922

 
108,787

 
10,897

 
181,258

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
1,096

 
3,225

 
14,129

 
—

 
18,450

Amortization of deferred acquisition costs
2,210

 
7,926

 
18,716

 
—

 
28,852

Universal life and annuity contract interest
7,868

 
9,244

 
54,326

 
—

 
71,438

Other operating expenses
4,947

 
6,125

 
8,466

 
5,305

 
24,843

Federal income taxes (benefit)
468

 
5,456

 
4,087

 
1,715

 
11,726

 
 
 
 
 
 
 
 
 
 
Total expenses
16,589

 
31,976

 
99,724

 
7,020

 
155,309

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,063

 
11,946

 
9,063

 
3,877

 
25,949



18
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
19,023

 
58,196

 
10,125

 
—

 
87,344

Net investment income
16,015

 
32,267

 
253,183

 
9,036

 
310,501

Other revenues
9

 
151

 
30

 
11,942

 
12,132

 
 
 
 
 
 
 
 
 
 
Total revenues
35,047

 
90,614

 
263,338

 
20,978

 
409,977

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
4,126

 
6,870

 
20,144

 
—

 
31,140

Amortization of deferred acquisition costs
4,245

 
13,713

 
41,698

 
—

 
59,656

Universal life and annuity contract interest
15,059

 
31,235

 
165,444

 
—

 
211,738

Other operating expenses
8,714

 
12,833

 
14,552

 
10,668

 
46,767

Federal income taxes (benefit)
938

 
8,386

 
6,944

 
3,330

 
19,598

 
 
 
 
 
 
 
 
 
 
Total expenses
33,082

 
73,037

 
248,782

 
13,998

 
368,899

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,965

 
17,577

 
14,556

 
6,980

 
41,078


19
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 
 
 
 
 
 
 
 
Selected Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
35,681

 
229,034

 
595,865

 
—

 
860,580

Total segment assets
430,613

 
1,062,917

 
8,149,053

 
228,674

 
9,871,257

Future policy benefits
367,968

 
795,992

 
7,152,771

 
—

 
8,316,731

Other policyholder liabilities
11,899

 
13,710

 
128,496

 
—

 
154,105

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 

 
 

 
 

 
 

 
 

June 30, 2012
 

 
 

 
 

 
 

 
 

Condensed Consolidated Income Statements:
 

 
 

 
 

 
 

 
 

Premiums and contract revenues
$
4,280

 
32,115

 
5,162

 
—

 
41,557

Net investment income
3,991

 
7,315

 
61,875

 
5,000

 
78,181

Other revenues
45

 
314

 
(260
)
 
5,767

 
5,866

 
 
 
 
 
 
 
 
 
 
Total revenues
8,316

 
39,744

 
66,777

 
10,767

 
125,604

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
1,620

 
6,315

 
5,922

 
—

 
13,857

Amortization of deferred acquisition costs
2,068

 
7,757

 
21,524

 
—

 
31,349

Universal life and annuity contract interest
1,230

 
6,431

 
18,343

 
—

 
26,004

Other operating expenses
2,578

 
6,718

 
7,744

 
5,412

 
22,452

Federal income taxes (benefit)
261

 
3,943

 
4,110

 
1,685

 
9,999

 
 
 
 
 
 
 
 
 
 
Total expenses
7,757

 
31,164

 
57,643

 
7,097

 
103,661

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
559

 
8,580

 
9,134

 
3,670

 
21,943



20
Table of Contents
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
14,819

 
55,546

 
11,474

 
—

 
81,839

Net investment income
9,809

 
22,712

 
186,264

 
8,954

 
227,739

Other revenues
52

 
346

 
(199
)
 
11,322

 
11,521

 
 
 
 
 
 
 
 
 
 
Total revenues
24,680

 
78,604

 
197,539

 
20,276

 
321,099

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,268

 
9,795

 
14,472

 
—

 
27,535

Amortization of deferred acquisition costs
4,459

 
13,365

 
45,236

 
—

 
63,060

Universal life and annuity contract interest
8,443

 
21,243

 
97,861

 
—

 
127,547

Other operating expenses
7,346

 
12,536

 
11,772

 
10,816

 
42,470

Federal income taxes (benefit)
376

 
7,006

 
9,120

 
3,060

 
19,562

 
 
 
 
 
 
 
 
 
 
Total expenses
23,892

 
63,945

 
178,461

 
13,876

 
280,174

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
788

 
14,659

 
19,078

 
6,400

 
40,925



21
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Reconciliations of segment information to the Company's condensed consolidated financial statements are provided below.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
45,581

 
41,557

 
87,344

 
81,839

Net investment income
129,687

 
78,181

 
310,501

 
227,739

Other revenues
5,990

 
5,866

 
12,132

 
11,521

Realized gains (losses) on investments
1,601

 
2,005

 
3,914

 
3,172

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
182,859

 
127,609

 
413,891

 
324,271


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
11,726

 
9,999

 
19,598

 
19,562

Taxes on realized gains (losses) on investments
559

 
702

 
1,369

 
1,110

 
 
 
 
 
 
 
 
Total condensed consolidated Federal income taxes
$
12,285

 
10,701

 
20,967

 
20,672



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Net Earnings:
 
 
 
 
 
 
 
Total segment earnings
$
25,949

 
21,943

 
41,078

 
40,925

Realized gains (losses) on investments, net of taxes
1,042

 
1,303

 
2,545

 
2,062

 
 
 
 
 
 
 
 
Total condensed consolidated net earnings
$
26,991

 
23,246

 
43,623

 
42,987




22
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
June 30,
 
2013
 
2012
 
(In thousands)
 
 
 
 
Assets:
 
 
 
Total segment assets
$
10,330,795

 
9,871,257

Other unallocated assets
181,982

 
84,204